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Launching a startup is easy. Keeping that startup alive and running, by also accumulating income, is one of the most difficult things you will go through as an entrepreneur. Owners often overlook some of the most significant factors that go into creating a profitable startup. Blinded by the idea that the most important thing is making a difference and revolutionizing the industry, these entrepreneurs often lose themselves in debt and bad resolutions.
The failure rate of startup companies remains a staggering 90 percent of the total number. Nevertheless, those 10 percent that manage to endure the market, usually involve companies that have grown into becoming one of the most influential representatives in the industry.
Before analyzing how to launch a profitable startup, step by step, let’s shortly examine the causes why they fail in the first place. You can’t learn one, without understanding the other.
What Are the Most Common Reasons Behind Startup Failure?
If you take the time to do proper research, you will find countless studies that thoroughly go over the reasons behind a startup failure. Starting from lack of focus and motivation to poorly adapting to market changes or weak strategies.
The numbers are not in your favor. Only one out of 10 startups make a breakthrough on the market. According to the latest analysis, the reason number one behind a startup's failure is the market, or more specifically - the shortage of product demand. It’s the main reason behind one-third of the total cases, statistics show. Unfortunately, despite expectations that they will take the market by storm, not every idea is suitable for the market at the given moment of launching.
The second most important reason is the lack of cash, however, running out of money is merely a symptom concerning other possible issues. Nonetheless, it’s a quite a serious problem considering that little less than 30 percent of startups fail because of this. If you don’t have enough money to pay vendors or your employees, chances are you are going to fail. Strong competition or a weak team are frequently overlooked causes, despite their importance. Moreover, according to the list, the lack of passion was also the cause of failure, with nine percent of the companies claiming that this was the root of their collapse. As the least common reason for startup failure was pivoting incorrectly or not pivoting at all.
These numbers were a part of an analysis of over 100 startup post-mortems.
So what do successful startup owners have in common? How can your recently established company approach the importance of LinkedIn or the functionality of Airbnb? They were all startup ideas once, and are now multi-million dollar corporations. Even for them, this task wasn't simple. After all, success doesn't come overnight. Instead, it requires effort and having a few tricks up your sleeve.
Bottom line, to reach this altitude, you will need to understand some basic rules and develop a particular mindset.
Let’s start with the basics first.
Rule No.1 - Build a Goal Pyramid
It may sound confusing or unnecessary, but in reality, the goal pyramid is a very helpful trick that will liberate you from stress and the fear of failure.
Many times people give up on their ideas only because they are afraid. The end goal seems distant and impossible to reach. Unless you build a goal pyramid.
According to research, setting up a specific time and date for achieving your goals adds a 90 percent possibility of you completing them. By building this pyramid, you will simply unwrap your big goals into many smaller ones. Visually unpacking these milestones will result in a much better performance for both you and your team. And the smaller the task, the easier it will be for you to accomplish it. The end goal will remain the same, but the milestones you need to hit to get there will be visually laid out, showing you just how achievable your end goal was. The more detailed goal pyramid, the better.
Besides this is a crucial step before doing anything else. It’s better to establish this pyramid before starting your business in order to see where you're currently standing and whether you should spend your time and patience on building a startup.
Ask Yourself – What Kind of Problem Are You Resolving And How?
One of the most important things when building a startup or business is knowing what the focus of your company is. This is particularly important when it comes to startups. As an owner and a CEO, you need to establish the specific focus of your work, meaning you need to determine what kind of problem you are dealing with and how you are going to resolve it.
What is your startup about? The focus of your startup is equivalent to the foundation of a building. If it’s weak, you won’t be able to build it successfully. Hence, you need to make the foundations solid and secure, in a way that the further expansion of your company will depend on it. Essentially, this means finding an effective middle ground between your skills, competencies, interests, and the capacity for getting paid.
Ask yourself these next questions:
- What am I good at the most?
- Will I enjoy doing this?
- How will this help people?
- Does the market need it?
Only after having answered them, especially the fourth one, you should proceed with the next steps. Otherwise, you will make the number one mistake concerning startup failures – the lack of product demand on the market.
Choose Customers & Market
This third step is in accordance with the questions above. After locating what you are great at, as well as establishing that you will get personal joy from this, next thing is to review your customers’ base and the market you are trying to enter.
You need to carefully choose your target audience of consumers. Determine their age, social background, even their gender. You cannot sell your product without a specific target group. One of the biggest mistakes you can make is trying to appeal to everyone. If you try and do this in order to sell more, in reality, you won’t sell your product at all. Besides, establishing a target group will provide you with a clear focus, prioritized resources, and a precise plan. In the beginning, you can focus on a smaller group of customers because it will be easier to satisfy their preferences.
Having done this, you can now think whether your solution is fitting for the customers' problem. If your answer is affirmative, only then you will be able to make money out of your business.
Some entrepreneurs even suggest making a survey. It’s a great way to find out whether these people are in need of your resolution, and the way your product is going to be perceived. Besides, surveys are easy to make and usually cost-effective.
After evaluating the results, the next thing you need to do is perform a simple market analysis.
You can start off by calculating your market size, and proceed by measuring the annual market size (AMS). For the first one, you need to take a few factors into consideration including the focus group and their approximate number as well as your penetration rate on the market. After doing this, calculate your market volume.
Market volume = Penetration rate X Number of target customers
For calculating the AMS use the following equation:
AMS = Market Volume X product price (the product you are going to offer to the market)
Remember to be very careful and specific about it. A simple mistake and your intended revenue will go down the drain. Make sure you estimate the highest and lowest possible revenues per year. That way you will be aware of your opportunities, and whether launching a startup will really pay off.
One more thing that many entrepreneurs forget: you need to choose the right pricing strategy for your business. A lot of entrepreneurs focus on their target audience, buyer personas, market and competitors without taking enough time about their pricing.
Generate Income & Decrease Expenses
Now comes the hard part. After checking out every previously mentioned checkpoint on this guide, now it’s time to think about growth and money. Depending on your business, you don’t necessarily have to follow these rules. However, they will give you a glance of what needs to be done, or at least considered when generating income or decreasing your startup expenses.
First of all – spend time on marketing.
Startup owners often disregard this simple rule. And it comes as no surprise, considering just how much work there is in a startup, especially in the beginning. Keep in mind that this should be done AFTER you have established a final version of the product/service that is going to be offered to the customers. Spending time on marketing and sales beforehand is usually a waste of time, money, and effort.
Make sure you that you are using smart marketing methods, based on good content and branding, instead of paid inorganic ones.
Ask for feedback and referrals.
At the early stages of your startup, it’s important to ask for referrals, and even more for feedback from your customers. It’s critical to follow your sales and use this information to improve your startup.
Track income and expenses at all cost.
Doing otherwise will seriously harm your startup and you will lose track of your growth. For this, you can purchase, or even better, make your own accounting system. It will assure you that your capital isn't being wasted. Besides, make sure that you prioritize your costs. Spend money only on the most necessary things regarding your startup. Don’t spend them on expensive tools that you can easily replace with a cost-effective resolution.
Last But Not the Least - Be flexible, patient, and active.
After launching a profitable startup, you shouldn't stop there, even if everything is going according to plan. As an entrepreneur and a startup owner, you should know by now that being flexible is a necessity. The market demands constantly change. In order to always be one step ahead of the competition, it’s crucial to know when and how to adjust to these changes.
Moreover, your growth might not be instantly visible. Sometimes this requires time, therefore, make sure that you are patient and don’t give up immediately. Nobody said it would be easy. If you thought that the hard work is only present in the beginning, you are very wrong. Owning a startup and turning it into a profitable company requires for you to be constantly involved.
And remember, even if everything is going perfectly fine, you should always be prepared for a failure.
Unfortunately, sometimes these things happen unexpectedly, and without realizing it, you have lost your startup. Even if you are certain that it won’t happen, make sure that you have an emergency exit plan. Dealing with failure, especially if you were not prepared, is a very troublesome thing to do. Unless you want to stay broke after this, make sure that you learn how to recover from one on time.
So, how to launch a profitable startup?
As you could see, launching a business or startup isn't that complicated. But, making your startup project a profitable one isn't that easy. A lot of entrepreneurs and startup owners want to gain users before monetizing. This strategy was working well 10 years ago when VCs and angel investors were just investing in users' numbers.
However, investors are more careful now and want to see revenue, sales' growth and even profits sometimes. So, you should think about monetization at the beginning of your startup journey. Don't let that to chance or randomness. Start by building a goal pyramid. Then, you should focus on fixing/resolving an issue, a problem. People will buy from you if you help them fix a problem they encounter.
What about marketing? Marketing should be a crucial element of your startup growth strategy. You need to know your target audience and market in order to deliver the right message to them. Once you know who your perfect customers are, you'll be able to set your voice tone and messaging and start making revenue. To go from sales/revenue to profitability, you need to track all your expenses and revenue.
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